I am a long term buy and hold investor who focuses on dividend growth stocks

Monday, August 27, 2012

How to Look Beyond Dividend Increases

As a dividend investor, I get rewarded any time that a stock I own pays me a dividend. I get particularly excited, when a stock I also regularly raises distributions. That being said, I thoroughly analyze financial statements, earnings estimates, major press releases, and try to gain a general feel of how a particular business is doing. In general, the story that makes me happy and willing to hold to my position, is when a company has managed to boost profitability over the past ten years and also has the potential to grow earnings into the next decade. For dividend investors, another important thing to look for is if the company has a culture where it shares higher profitability with investors in the form of higher dividends. If all of these are present, and the company also is attractively valued at the moment, I tend to analyze it and if I like the story, I might even initiate or add to my position in it.

Over the past week, several companies announced that they are increasing distributions for shareholders. The other common characteristic behind these companies is the fact that each one has raised distributions for over five consecutive years. I reviewed the list of consistent dividend raisers for the week, and included my brief commentary behind each stock or group of stocks. The companies included:

Realty Income Corporation (O) engages in the acquisition and ownership of commercial retail real estate properties in the United States. This REIT raised its quarterly dividends by 3.40% to 15.11 cents/share. This dividend achiever has raised distributions for 18 years in a row. Yield: 4.20% (analysis)

The company has been one of the few Real Estate Investment Trusts which managed to maintain distributions during the financial crisis, and even to increase them slightly. Over the past 5 years, dividend increases have been rather slow. This current dividend increase is pretty high, and hopefully signals management’s bullish outlook on future Funds from Operations (FFO) growth. I consider the current yield to be low, however I like the fact that management has continued diversifying operations and taking advantage of low interest rates to acquire income generating properties. That being said, I would like a current yield of at least 5%, before I add to my position in the company.

Cincinnati Financial Corporation (CINF) engages in the property casualty insurance business in the United States. The company raised its quarterly dividends by 1.20% to 40.75 cents/share. This dividend champion has raised distributions for 52 years in a row. Yield: 4.10%

While I admire the company’s long streak of consecutive dividend increases, I am not so sure about the future. In the past year, Cincinnati Financial has barely been able to cover its dividend payments. In addition, over the past four years, its distributions growth has been very low. As a result, I am still holding on to my position in the stock, but would consider selling if yields drop below 4%.

Community Bank System, Inc. (CBU) operates as the bank holding company for Community Bank, N.A. that provides various banking and financial services to retail, commercial, and municipal customers. The company raised its quarterly dividends by 3.80% to 27 cents/share. This dividend champion has raised distributions for 20 years in a row. Yield: 3.90%

While I like the long history of dividend increases, as well as the above average yield, I am a little hesitant about the latest slow rate of dividend increases. Low dividend increases typically signal that management does not have a very bullish outlook on near term business prospects. That being said, I do like the ten year dividend growth rate of 6.40%/year, as well as the fact that dividend is adequately covered from earnings. I would add the company to my list for further research.

MGE Energy, Inc. (MGEE), through its subsidiaries, operates as a public utility holding company in Wisconsin. The company raised its quarterly dividends by 3.30% to 39.51 cents/share. This dividend champion has raised distributions for 36 years in a row. Yield: 3%

This is another company which has a long streak of consecutive dividend increases, but offers a low yield, low dividend growth that would hardly cover inflation and has a high dividend payout ratio. I would consider it to be a hold at best.

Brinker International, Inc. (EAT) owns, develops, operates, and franchises various restaurant brands primarily in the United States. The company raised its quarterly dividends by 25% to 20 cents/share. This dividend paying company has raised distributions for 8 years in a row. Yield: 2.30%

Delta Natural Gas Company, Inc. (DGAS) distributes or transports natural gas in central and southeastern Kentucky. The company raised its quarterly dividends by 2.90% to 18 cents/share. This dividend paying company has raised distributions for 8 years in a row. Yield: 3.60%

Atrion Corporation (ATRI) , together with its subsidiaries, develops and manufactures fluid delivery devices, and ophthalmic and cardiovascular products primarily for medical applications in the United States, Canada, and internationally. The company raised its quarterly dividends by 14.30% to 56 cents/share. This dividend paying company has raised distributions for 10 years in a row. Yield: 1%

HCC Insurance Holdings, Inc. (HCC) underwrites non-correlated specialty insurance products worldwide. The company raised its quarterly dividends by 6.50% to 16.50 cents/share. This dividend achiever has raised distributions for 16 years in a row. Yield: 2%

Westlake Chemical Corporation (WLK) manufactures and markets basic chemicals, vinyls, polymers, and fabricated building products. The company raised its quarterly dividends by 154.20% to 18.75 cents/share. This dividend paying company has raised distributions for 9 years in a row. Yield: 1.10%

For the above five companies, I would keep an eye but would pass for now, due to the fact that they offer low yields and do not have long histories of dividend increases. That being said, I would add Brinker International to my list for further research.

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